Question

Double checking my answers.....

Question 1

You have $1,000,000 of available capital and the following independent investment opportunities of equal risk.

Project A: Cost = $500,000 and NPV = $60,000

Project B: Cost = $1,000,001 and NPV = $135,000

Project C: Cost = $750,000 and NPV = $90,000

Project D: Cost = $260,000 and NPV = $35,000

Which should be rejected?

Answers;

Projects A, C & D

Projects A, B & D

Projects B & C

Projects A & B

I chose Projects A, C & D

Question 2

How long should you keep the following company?

WACC = 8%

CF Year 0 = $1,500,000

Salvage = $1,500,000

CF Year 1 = $750,000

Salvage = $1,250,000

CF Year 2 = $600,000

Salvage = $425,000

CF Year 3 = $800,000

Salvage = $0.00

Answers:

Year 1

Year 2

Year 3

I chose Year 1

Answer 1

1)

Project	Initial Investment	NPV	NPV as % of Initial Investment [NPV/Initial Investment]	Ranking Based on % Return [Highest to Lowest]	Acceptance in the order of Ranks[upto total initial investment of 1000000]	Initial Investment	NPV
A	500000	60000	0.12	3	Accept	500000	60000
B	1000001	135000	0.134999865	1
C	750000	90000	0.12	3
D	260000	35000	0.134615385	2	Accept	260000	35000
					Total	760000	95000

Altough, B has 1st Rank, it cannot be accepted, because it requires more capital than total available capital.

Therefore, Project B & C

2)

Year	Discounting Factor [1/(1.08^year)]	Cash Flow	PV of Cash Flows (cash flow*discounting factor)
1	0.925925926	750000	694444.4444
2	0.85733882	600000	514403.2922
3	0.793832241	800000	635065.7928
		NPV = Sum of PVs	1843913.529

At Year 0, PV of Future Cash Flows is Greater than Salvage Value at Year 0. Therefore, Project should be continued.

Year	Discounting Factor [1/(1.08^year)]	Cash Flow	PV of Cash Flows (cash flow*discounting factor)
1	0.925925926	600000	555555.5556
2	0.85733882	800000	685871.0562
		NPV = Sum of PVs	1241426.612

At Year 1, PV of Future Cash Flows is LESS than Salvage Value at Year 1. Therefore, Project should be abandoned.

Therefore, Year 1